The Looming Retirement Crises: The Perfect Storm

America, the land of opportunity. The most powerful and prosperous nation in world history...is in one of the most perilous places in its history. As millions of baby boomers ready themselves for retirement, most are doing not nearly enough! To make matters worse, rising healthcare costs, overextended long-term-care capacity, under-funded retirements and the looming Social Security crises could all converge at the most inopportune time and create a Perfect Storm. Whether you are already retired or planning to, be sure to head this wake up call before it's too late.

Every year, more and more Americans move toward retirement with insufficient savings, and with this the country is moving into dangerous territory. The American Institute of Financial Gerontology notes that although the average American life span is 77.2 years, a person who reaches the age of 65 can expect to live to age 83, while 26% of all 65-year-olds today will live past the age of 90. By the year 2030, the percentage of persons in the U.S. age 65 or older will reach 20%. Considering that people over age 65 spend four times as much on healthcare as their younger peers, according to AARP research, and that end-of-life care, can eat up 50% or more of an individual's lifetime healthcare funds, every American had better recalculates their retirement planning strategy, regardless of whether you are already retired or planning too.

Will you have enough to retire?
The problem is that people fail to make a provision even remotely adequate for maintaining their pre-retirement lifestyle. Studies found that U.S. savings rates (estimated to be around 1.1% of net income) are somewhere between 25% and 38% of the amount required to meet overall retirement needs; that Social Security will make up 80% of retirement income for the least wealthy 20% of retirees; that approximately 48% of all households are on track to accumulate adequate retirement wealth (meaning, of course, that the rest are not); and that at current mortality rates, the average under-funded household faces 19 years of unfunded living expenses. The answer is clear; it’s time to build up that nest egg that we always thought would just appear on its own. Studies suggest that people age 50 and over immediately begin to set aside 13% to 23% of their current gross income.

In the past, there were three sources of income for a retiree: (1) a defined benefit pension plan; (2) Social Security; and (3) personal savings. In retirement, two of these--the largest two--took the form of monthly checks. Workers defined their retirement assets in terms of the monthly income they expected to receive from Social Security and a company pension, whose total could be quickly and easily translated into a fairly clear picture of their expected lifestyle.

Over the past 20 years, defined contribution arrangements have increasingly replaced the defined benefit leg of the stool. Instead of counting on professionals to manage their asset pool (as was the case with a defined benefit plan), workers are expected to make their own long-term investment decisions. More important, workers are expected to do on their own what pension actuaries once did with sophisticated computer models: Figure out how the lump sum of their savings nest egg can be translated into an income stream at retirement, and manage it in the proper investment vehicles so that the income stream doesn't dry up over unpredictable cycles of market returns.

Managing your own money is a daunting task. The overwhelming number of choices, accompanied with the fear of  making a mistake is paralyzing, and often leads to the wrong portfolio, many times holding assets that were bought for the last bull market and not the next one. This is particularly true with retirees, as many investors still have a portfolio of “yesterdays” investments and not one for tomorrow. Obtaining the highest returns with the least risk possible is critical.

Be the expert…or hire one!
Personal finance and making a retirement plan is serious business. You need to get the fundamentals down pat, spend a lifetime updating yourself on the rules and laws, and learn the ins and outs of calculations for retirement in particular. For instance, did you know that Each year a person postpones retirement reduces his or her need for retirement savings by about 5%, while increasing Social Security benefits by 7%. Unfortunately, hardly any pre-retiree takes the trouble to figure out that he or she will almost certainly need to plan to live a good 20 to 30 years after retirement. In that time, the price level will almost certainly rise dramatically, even at present low levels of inflation. How do you deal with that when most of us can barely afford to have enough to retire on for the first few years after the gold watch?

In addition, there is the investment management to consider. You can't just read "The Wall Street Journal" for a few months and expect to get it. This is serious business, and small mistakes today, whether with too aggressive or  too conservative a portfolio, can create enormous problems tomorrow.

For some reason people always think they can take short cuts with their retirement planning. The majority of people actually spend more time researching to buy a refrigerator than they do planning for their retirement! The biggest mistake one can make is to fail to educate themselves or hire a finance specialist to take care of them. For Men and women, but especially men, hate to ask for directions. This is a cliché about driving, and I don't know if it's true or not, but it most assuredly is in personal finance.

It’s the distribution and  succession, not just accumulation
For those who do prepare properly, careful consideration must be paid to not only saving and investing the money, but on the proper mechanics on how the assets need to be held in order to maximize your income distribution through  your retirement. It does no good to spend your life saving and investing wisely only to give it all back to Uncle Sam! After all, it’s what you and your loved ones keep, that counts.

Keith W. Springer is Registered Investment Advisor and President of Capital Financial Advisory Services, providing Wealth Management and Mortgage Consulting Services.  For more information on how to build and maintain a solid retirement plan, please contact Keith Springer at 916-925-8900 or keith@capfas.com

Additional related articles written by Keith Springer on retirement planning that are available:
New Rules to Help Your Retirement and Estate Planning (new)
46 Frequently Asked Questions About Retirement
Flipping the Switch to Retirement